May 12, 2014
Interviewed by: David Snow
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Deal Success & Family-Owned Businesses in Colombia

Experts from Tribeca Asset Management and Advent share stories about the Colombian private equity market. You’ll learn how Tribeca built up and then exited a “doctors on wheels” healthcare company that went pan-Latin America and the difficult conversations that must be had with families ahead of investing in their companies.

Experts from Tribeca Asset Management and Advent share stories about the Colombian private equity market. You’ll learn how Tribeca built up and then exited a “doctors on wheels” healthcare company that went pan-Latin America and the difficult conversations that must be had with families ahead of investing in their companies.

Deal Success & Family-Owned Businesses in Colombia

Private Equity in Colombia

David Snow, Privcap: Today, we are joined by Eva Garcia de la Fuente of EY, Felipe Iragorri of Tribeca Asset Management, and Mauricio Salgar of Advent International. Welcome to Privcap. Thank you for being here.

We’re talking about the Colombian private equity opportunity. I’m thrilled to be joined by all of you and I’d like to hear stories of what it’s like to be a private equity investor in Colombia, stories of success, or even stories of frustration in dealing with an earlier-stage market. Let’s start with Felipe. You did a deal in a healthcare company here in Colombia that you’ve already exited and, in fact, you had such a good experience that you have reinvested. Can you talk about that company, why you liked it, where you thought it would go and what the exit was like?

Felipe Iragorri, Tribeca Asset Management: Yes. The company is Grupo emi—it is a healthcare company, subscription-based model. It’s what we call “doctor on wheels.” You pay $15 or $20 a month—fairly cheap for mid- and even low-market—and it’s out of pocket, so there’s a difference there. It’s a very reputable image, a very good brand, 100,000 subscribers when we went in, $12 million of revenues, and $1.8 million of EBITDA. We took the company from there through acquisitions and through growth, normal growth, and organic growth up to one million subscribers and eight different countries in Latin America. Today, it’s a company with $120 million of revenues and $21 or $22 million of EBITDA this past year. So it grew tenfold and today it’s the leader in that sub-segment of the healthcare industry.

Eva Garcia de la Fuente, EY: Were you involved in the management? Some private equity firms sit back and just manage on top high level. Or were you involved in managing that expansion and geographical growth?

Iragorri: In Tribeca, we’re really active investors. We’re not just financial investors or board members and so on. As a director and partner in Tribeca, I manage that investment. I wasn’t just a member of the board of directors; of course, I was member of the management committee. This was meeting, let’s say, every week. We brought professional management to the companies and parts of it and we were very involved in the acquisition spree.

Mauricio Salgar, Advent International: I’m curious to understand how tough was that integration—in the rolling up and buying other countries—in practice?

Iragorri: The good news in that acquisition spree we went on is that many of the acquisitions were done through companies exactly the same, with the same service. Sometimes we don’t even change management. We changed the brand, some operations we brought, like IT, which was very important for this company. But integration was very easy, because they offered the same service.

Garcia de la Fuente: In my experience, it’s typical. In an acquisition, the private equity usually changes the CFO but not top management. Correct me if I am wrong here in Latin America. What do you think?

Iragorri: In our case, let’s say the CO and CFO that were in place were taken to another market and the CFO as well. Today, they are not even in the company, but that’s eight years ago. But we brought the CO and the CFO for the corporate level because one thing is the integration. For the integration, we needed some—

Garcia de la Fuente: —The knowledge. Mm-hm.

Iragorri: Knowledge of integration. The CO didn’t come from healthcare. He came from Carrefour in Spain, but he managed part of the integration of Carrefour and Promodes, so he was important management there. The CFO was a very knowledgeable guy who came from one of the biggest healthcare companies here as a CFO as well.

Snow: Mauricio, I’d love to hear some of your stories. I won’t ask you to name names because the stories get better when you don’t, but one feature of doing private equity in any emerging market, including Colombia, is that you’re dealing with many family groups. So, do any particular experiences stand out in your mind as you’ve done them?

Salgar: Yes, many. In general, the approach when you start talking to a family… Since Colombia is now in hype mode, everybody wants to invest, all these people read the newspapers and the investment banks have done their job, they visit them, they show them this comparable table, and then they believe their company is worth incredible numbers. Then, you need to try to convince them that is not the case and you’re willing to deal at a different value. Typically, a way to try to convince them is to say, “We’re going to do a partial acquisition. For your company to be worth a lot more, you need to have the dry powder to be able to invest in growing your company.” You need to enhance the governance model and the whole value-enhancing plan we bring to the table and somehow try to convince them that the entry price is not as high as they would want. But, they will remain with a significant stake on the company and then five or six years down the road, when we both exit together, we’re going to make a lot of money.

That’s a great story to tell, but then you’re sitting with the entrepreneur, his wife, the kids, and the second and third generation. To try to get this message across is tough. And, if the manager has been the CO or is at the same time the CO, you need to enter the discussion of splitting the role of being a shareholder and being a professional manager. Then, you start telling him you’re going to pay him a salary but that he’s going to sign—

Snow: He can’t just go to the bank.

Salgar: Correct. But at the same time, you’re going to sign a labor contract and have some KPIs on which you’re going to pay him a bonus, but that’s different from dividends and it takes a lot of time.

Garcia de la Fuente: But Mauricio, when we talk about the family-owned business here in Colombia—sometimes, Colombian family-owned businesses can be very big.

Salgar: Very?

Garcia de la Fuente: Very big. Very big corporations.

Salgar: Yes.

Garcia de la Fuente: And, outside of Colombia, when you think about the family-owned business, you’re thinking about medium or small-sized business.

Salgar: Yes. There are companies that have experienced growth and hundred to 100,000 operating under a family-owned setup.

Garcia de la Fuente: And that’s the corporations—

Salgar: So, that’s an interesting conversation. You have to remember that this was not in Colombia and I will not say in which country it happened –

Snow: You’re really protecting this group!

Salgar: Actually, this was a family I was involved in my previous life when I was in industry now, but we’re talking to the owner of the business and the wife. As part of the deal, he was going to step out from his CO role. He was going to join the board, but then he will no longer have a day-to-day job. And, in the middle of the conversation, the wife comes and says, “Really? He’s going to be at home every day? No way.”

Snow: That was a deal killer.

Iragorri: Deal breaker.

Salgar: “You need to make sure he goes to the office and he leaves home every day by nine.”

Snow: Does anyone have interesting due-diligence stories? Private equity firms want to know a lot about the businesses they’re going to invest in and they might take some time and energy to discover that. Anything that stands out in your mind as being noteworthy?

Iragorri: Especially when there are family-owned businesses, their wallet is in the business. So, you have to divide what’s from the real business and what are the expenses that come to the family.

Garcia de la Fuente: You have to redo the numbers.

Iragorri: Yes. You have to redo the numbers and so on. Sometimes it’s difficult, especially if the entrepreneur’s staying as the manager—he wants to keep some of the good things there, but it’s in the market, let’s say, having five cars and so on. Also, a discussion for the family, but in the due diligence it’s difficult to divide that and really calculate—

Garcia de la Fuente: —Isolate what is exactly the business.

Iragorri: Exactly.

Garcia de la Fuente: Yes. The operational and nonoperational issues there are quite a lot. This reminds me of Spain, 10 or 15 years ago. Thank God—

Snow: Where you are from.

Garcia de la Fuente: Where I am from. Exactly.

Snow: And where you used to do business, right?

Garcia de la Fuente: Exactly. But this changed and this is very positive in Colombia, because IFRS is coming. This will stabilize the accounting and definitely will improve the quality of the information, which is very weak so far.

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